ANALYSIS: After Middle East calm, risks revert to US tariffs

Metro Manila, Philippines - With the ceasefire between Israel and Iran appearing to hold, the economic team of President Ferdinand “Bongbong” Marcos, Jr. is maintaining the view that the Philippines will cap the year with a stable dollar-peso exchange rate and cooling inflation.

But the risks shift back to trade tariffs and other global uncertainties as the July 9 lapse of the 90-day pause in US President Donald Trump’s sweeping reciprocal tariffs draws near. The resulting forecast: moderate growth, widening budget gap, and a yawning trade deficit, based on the latest macroeconomic assumptions released by the interagency Development Budget Coordination Committee (DBCC).

A close Marcos economic adviser, Frederick Go, said the Philippines is racing against time to clinch a trade deal with Trump as the ultimatum expires in two-weeks, joining the bandwagon of trading partners talking to Washington.

“We continue to negotiate with the US. We have submitted some of our suggested negotiation points and the US has also responded. It’s back-and-forth,” Go, special assistant to the president for investment and economic affairs, said in a late press briefing on Thursday, June 25.

“The only update I can give you as of now is that it still is July 9 to conclude the negotiations,” he said.

Exports are now expected to contract by 2 percent this year, from an initial forecast of a positive 6 percent growth, the DBCC said after its June 26 meeting. Under Trump’s new policy, Philippine exports will be slapped with a 17 percent tariff, half of the rate Manila imposes on incoming US goods. The baseline is 10 percent for favored nations.

Imports growth will likely pale to 3.5 percent, a scaled down forecast from the 5 percent initially projected by the economic team, but with the expected contraction in exports, trade deficit will widen and tariff collections could shrink.

Already, the Department of Finance said the economic team has changed the financing mix to fund next year’s national budget of P6.793 trillion, a watered-down version of the combined P10-trillion originally sought by government agencies. The government can only haul P4.5 trillion in revenues this year, while it has to spend P6.08 trillion, or a budget gap of 5.5 percent as a proportion of gross domestic product (GDP) or economic output. By 2026, that budget deficit hardly budges at 5.3 percent of GDP.

“The deficit in the tax revenue, we expect to collect more on the non-tax revenue, particularly the dividends on GOCCs… BTR (Bureau of the Treasury) income has increased drastically from May and then we also have other non-tax that we will be collecting. Those deficits in tax revenue will be collected more through non-tax revenues,” Finance Assistant Secretary Karlo Fermin Adriano told a press briefing.

With trade rules and geopolitics wobbly, growth expectations have been tempered. The growth goal for 2025 has been revised to 6 percent, give or take a percentage point, from 7 percent previously. Growth prospects for the next two years have also dimmed to a 6-7 percent range.

“The revisions take into account heightened global uncertainties, such as the unforeseen escalation of tensions in the Middle East and the imposition of US tariffs,” Budget Secretary Amenah Pangandaman, chairman of the DBCC, said during the DBCC briefing.

The de-escalation between Israel and Iran is giving oil markets some confidence, so the upside: the benchmark Dubai crude has fallen back below $70 per barrel, within the DBCC’s revised range of $60-$70 per barrel.

That somehow has calmed investor anxiety over price pressures that could have prompted the Bangko Sentral ng Pilipinas (BSP) to step on the brakes of its easing cycle.

But emerging from the DBCC meeting, BSP Deputy Governor Zeno Abenoja said the regulator has room to further cut its benchmark interest rate, with inflation likely to settle below the 2 percent-4 percent target range for the year.

“Inflation will continue to be manageable, benign over the near term. Growth may moderate, but remain firm,” the central bank official told reporters.

Inflation expectations have been influencing the exchange rate. And with the inflation path getting back on track, the peso has come off multi-month lows against the dollar to trade within P56.45 and P57.655 this week.

BDO’s research unit said in a note: “Domestically, June inflation data will likely influence the peso’s performance.”

“Dovish Fed remarks and concerns about President Trump’s plans for a new Fed chair weakened the dollar,” BDO’s research note read.

The DBCC has penciled in a P56-P58 forecast against the greenback, unchanged from its projections made last December.